China is willing to pay double, even triple to get natural resources

[News Analysis] ‘China is willing to pay double, even triple, what Korea is willing to pay to get natural resources.’ - Kim Shin-jong, CEO, Korea Resources Corporation
March 10, 2010

‘The world’s factory” - this is the nickname China has acquired over decades of building its exports. But a factory needs raw materials to run, and as the country’s industry has grown so has its thirst for fuel. Today China is the top national consumer of natural resources, devouring 9.5 percent of the world’s annual supply of crude oil, 42.6 percent of its coal and 57.7 percent of its iron ore.

To ensure the factory stays fed, China has embarked on an international shopping spree in recent years, snapping up oil fields and iron ore mines all over the world. All the country’s burgeoning might has been thrown behind securing a steady supply of natural resources.

With a continental competitor right next door, some have grown concerned that Korea may not be able to keep pace.

The purchase of Switzerland-based oil producer Addax Petroleum Corp. by Sinopec Corp., China’s second-largest oil company, illustrates how far ahead China is in the resource battle. Sinopec outbid the Korea National Oil Corp., offering $7.24 billion in June 2009, even though the KNOC initiated the bidding process. It was a crushing defeat for Korea.

Addax produces an average of 137,000 barrels of crude a day, which is equivalent to 1.5 percent of China’s daily oil consumption.

No competition for China

With foreign currency reserves of more than $2.39 trillion, China, along with state-owned banks and state-run oil companies like Sinopec, has nearly monopolized mergers and acquisitions with natural resource companies.

China accounted for 4 percent, or $19 billion, of global cross-border M&A activities in the first quarter of 2009, according to Hyundai Research Institute. Of that, 98.8 percent of mergers and acquisitions by value were related to energy, utilities and natural resources. That amount dwarfed the $6.7 billion invested by both state-run and private companies in Korea in 2009.

Korea’s state-run energy companies, such as the KNOC, are now struggling to secure independent supplies, but the country lacks China’s financial resources. Government officials who toured oil-rich nations in Africa said they now realize how aggressive China has become.

“I was puzzled after hearing from Angolan government officials that there was no point in talking unless we were going to invest billions of dollars,” Lee Jae-hoon, a former vice minister of knowledge economy, said at a seminar, discussing a trip to explore and acquire rights to African oil fields. “China was easily offering billions of dollars, while we only suggested hundreds of millions maximum. We were simply no competition for China.”

Synn EuGene, vice president of new ventures at the KNOC, said, “China not only has its own oil reserves, but it also started exploring oil around the world in the 1990s, because it could not satisfy domestic demand due to its fast economic growth.”

The KNOC is the only oil company in Korea, Synn said, since private companies such as SK Energy and GS Caltex are refineries rather than oil companies.

“There is too much risk for private companies to focus solely on oil exploration, thus oil exploration is given a lower priority at those companies,” Synn said.

The KNOC may be the one and only oil company in Korea, but it is just one-ninetieth the size of global leaders such as BP or Royal Dutch Shell in terms of capital. In a ranking of energy companies compiled by Petroleum Intelligence Weekly in 2008, KNOC ranked 95th, while Japan’s Inpex Corp. came in at 49th and Nippon Oil Corp. was 83rd. Meanwhile, China’s CNPC came in fifth, Sinopec was in 25th place and Cnooc ranked 48th.

And that difference in size makes all of the difference on the global playing field.

Korea’s cross-border investment in oil fields is much smaller than China’s and Japan’s. In 2008, Korea spent $4 billion on developing and acquiring oil fields internationally, while Japan invested $6.4 billion in 2007. China has invested seven times as much as Korea, spending $27.7 billion in 2007, according to the Ministry of Knowledge Economy and the International Energy Agency.

China’s aggressive stance makes it harder for all other nations to obtain rights to natural resources, especially crude oil. For countries like Korea, which imports most of its raw materials, such competition can be a major threat to the health of the economy.

Not many people are aware of the fact that Korea is also an oil producing state. That’s because production here is minuscule.

The KNOC discovered a liquefied natural gas field in the continental shelf of the East Sea in 1987. The company started developing the site in 2000 and began production in 2004. But reserves there total just 37 million barrels.

Korea obtains just 5.7 percent of its energy resources from reserves it has developed domestically or internationally, compared to 19 percent for Japan, 26 percent for China, 62 percent for Spain and 97 percent for France.

The global economic recovery could lead to an increase in demand for crude oil, especially in quickly developing countries like China. Since investment in oil field development fell overall for the first time in 10 years in 2009 due to the sluggish economy, with spending on oil exploration and development down 10 to 20 percent according to the International Energy Agency and Barclays Capital, the recovery could easily lead to a supply problem.

“If demand for crude oil rises despite stagnant growth in the oil supply, there is a chance of an energy crisis like the one in early 2008,” said Lee Kwang-woo at the LG Economic Research Institute. “Some research institutions have anticipated problems in oil supply as early as 2011.”

In June 2008, the price of WTI crude oil hit an all-time high of $145 per barrel, though it had fallen to a low of $30 per barrel in December due to the economic crisis.

However, crude oil prices are now on the rise, albeit slowly. The price of Dubai crude oil jumped nearly 70 percent last year. Now it hovers at around $75 per barrel.

“Natural resource development needs a long-term investment and requires a huge amount of capital,” said Lim Sang-soo, a researcher at the Hyundai Research Institute. “We all know that the government needs to increase the size of its energy companies to make them comparable to the ones in China, but realistically speaking it is very difficult because there are not enough financial resources to do that.”